Key Concept 4: Ad Hoc Patent Office

Institutions create ad hoc patent offices by compelling the assignment of patentable inventions, obtaining patents on those inventions issued to the institution, and then re-issuing the patents as private monopolies. Such ad hoc patent offices forestall the market for inventions by intercepting them, seeking to raise their value, and then reselling them as monopolies. Inventors are required to assign their inventions to the office, which then has U.S. patents issued to it. The office then re-issues those patents on its own terms. Key characteristics that differentiate an ad hoc patent office from a market for patents are 1) assignment of inventions to the office is mandatory; 2) the office has patents issued in its name–it does not act as an agent for the inventor; 3) the office trades in patents using conditional assignments that convey a patent monopoly to a private party in exchange for a financial share in the private exploitation of the patent.

Federal government agencies operate ad hoc patent offices when they require inventors to assign inventions to the federal government, and then issue patents to themselves, to be managed by the federal agencies. Under Bayh-Dole a federal agency may issue exclusive licenses, with express authorization to include the right for an exclusive licensee to enforce the patent–essentially making an exclusive license into an assignment. The patent is re-issued, as it were, to the exclusive licensee, who holds the patent (other than with regard to the information at the USPTO) as its own, subject to those requirements in the license that the federal agency is willing to enforce–which may mean, other than submission of reports and an initial payment, there is no enforcement at all.

When a university compels inventors to assign their inventions, acquires patents on those inventions, and then offers to assign or exclusively license the inventions, preserving the patent monopoly for the new acquirer, an ad hoc patent office comes into existence. The university ad hoc patent office then re-issues the patents under terms that different from those of the patent system. When the university is a public university, an instrument of state government, then a state government compels inventors to assign inventions to the state so that it has standing to direct that the federal government issue patents to the state government, to be exploited for financial value as monopoly assets.

Monopoly Concerns Behind Federal Patent Law

Behind federal patent law are two concerns that led to restricting patents to inventors based on the novelty of their inventions–government interest in money and favoritism. Both concerns have to do with the potential for abuse of government-created monopolies by government. An early use for patents was to raise money for government. In England, the monarch claimed ownership of gold and silver mines, and demanded a share of the ore (or refined metal) that came from each mine–hence, a “royalty.” The New England colonies before the republic also dealt in patents and similar franchises. An operator might obtain a patent to operate a ferry on the Hudson river, for instance, with the state taking a portion of the revenues. Monopolies could be invoked in this manner to insert government financial interests into activities judged to have sufficient value to generate revenue if turned into private monopolies.

Along with a revenue interest in monopolies came the related problem of favoritism. If a government could create a monopoly at will, then it could also award that monopoly to whomever it favored. Thus, patents and related franchises could be offered to political friends and denied to those in opposing parties. The potential for abuse is great–those in government then not only reward their friends with patents but also they then bias government toward the financial success of the patents they have re-issued to those friends. Government gives up the appearance (if not the fact) of being even-handed to all that it regulates. If a government has a financial interest in the success of ventures based on patents it has re-issued, then who is it that oversees the activities of those ventures and considers safety, unfair competition, and equitable regulatory decisions? In theory, of course, we might posit that everyone has integrity and government officials are impervious to influence, and that an exclusive license that preserves a patent monopoly is awarded on merit among competing bidders–but that theory does not appear to conform with the reality of human behaviors; hence, the U.S. patent system was designed to isolate government from trading in patent monopolies other than to issue them, on inventive merit, to inventors in exchange for publication of their inventions.

Preserving the Patent Monopoly

When a government issues a patent to itself, or when a state government has the federal government issue a patent to it, the government obtains an entire patent right to control all substantial rights in the claimed invention. The government then has the exclusive right to use the invention and may use the courts to enforce the patent against others who might use the invention. Given that governments tend not to be the sole users of an invention (though they may be for military inventions, and in the case of the U.S., for nuclear energy and space technologies for some decades). If a government is going to exclude its citizens’ use of an invention, then it must be for other than a competitive or financial–for public safety (as in the case of an unsafe medical compound) or for quality of manufacture (to prevent poorly made goods) or for management of manufacturing conditions (where otherwise unavailable, specialized equipment, say, is required to protect workers or treat waste).

Of course, as a matter of public policy, we could agree to have our government pursue monopoly positions in competition with private efforts, and to seek to exploit those positions for the government’s financial gain and/or to reward friends with favored monopolies. It’s just that in general, the U.S. patent system was designed to prevent such trade. We recognize that a government-held patent ought to be used in the “public interest”–that is, the interest served by government on behalf of all its citizens. If the government plays favorites, then it loses its standing as an objective arbiter on behalf of citizens and we are back to the practices of monarchy and aristocracy, in which the favored play be special rules unavailable to the rest.

Now consider what happens if a government, having had patents issue to it, then passes these patents to others outside of government. It has established a trade in its own patents. It reissues patents that were designed to go to inventors based on the merit of their inventive work. Now each patent goes to a company that obtains the entire patent right–all substantive rights to the invention, including the right to enforce the patent against infringers. The exclusive license is in fact an assignment, but the assignment is recorded in the ad hoc patent office–the “technology transfer” office–rather than in the USPTO. Again, it is an ad hoc patent office operation, dealing with U.S. patents but not following the rules of the USPTO. The ad hoc patent office compels the assignment of invention rights, has patents issued to itself, and then trades in these issued patents as monopolies to companies willing to give the office a financial stake in the exploitation of the monopoly that government has created and captured.

Favoritism Masked as Favorite Plan

Unchecked, a government-operated ad hoc patent office can easily come to play favorites or work to maximize its financial returns by imposing restrictions on the assignees of its patent interests that preserve monopoly practices such as a high price in the market and exclusion of others unless they pay a premium price (so, no sublicensing to dedicate an invention to a standard or to acknowledge humanitarian concerns–even though U.S. courts have found such a failure to be a matter of antitrust).

The apparatus to limit favoritism (or at least the appearance of favoritism) by these ad hoc patent offices includes submission of plans to develop an invention. An “applicant” (to use the Bayh-Dole terminology) must submit a plan for the development or marketing of the invention. Thus, the issuance of a license (with express provision that the license may be exclusive) depends not on the merit of the inventive work (for which the patent was originally issued) but on the merit of the plan presented by an applicant. The idea is that such merit is an acceptable method by which the federal government may re-award a patent. But the merit of a plan is significantly different than the merit of an invention. While both involve a degree of judgment, the merit of inventive work lies in a review of the past, while the merit of a plan to develop an invention lies in statements about the future, where a rosy picture of profits from timely exploitation of a monopoly would appear to have greater merit than a bleak picture of uncertainties and problems that might delay development or limit profits from the attempt.

In practice, there is another problem that theory doesn’t notice. There often is no more than a single “applicant” for any invention available from an ad hoc patent office. In one case (Public Citizen Health v. National Institutes), the licensing director at a federal agency ad hoc patent office testified that this was the case–a plan submitted by an applicant was not likely to have any competition. There was no comparison of plans, just an assessment of whether the plan has sufficient merit to justify re-issuing the patent to the applicant. In that, the financial elements would appear to contribute the most toward a determination of merit.

While there is an apparatus that makes a show of requiring a plan, there is no requirement that an ad hoc patent office enforce the plan. Thus, even though Bayh-Dole requires a federal agency to require a plan, and to make elements of that plan part of the licensing agreement, Bayh-Dole also allows the agency to waive those elements (so the agency may extend the licensee’s promised time to make a commercial product). A similar condition holds for other private patent office practices. While the office may make a show of requiring a plan as the basis for determining the merit of an exclusive license, there’s nothing that requires that office to enforce that plan as part of any license/assignment of the patent, even if the plan is included as material to the license.

Financial Interest as Monopoly Tax

When the government operates a private patent office to re-issue patents (often called a “technology licensing office” and its work products “exclusive licenses”), the financial interest it asserts in the activities of the patent assignee operate as a tax on that activity, just as a monarch expects a “royalty” of silver ore from a mine over which the monarch asserts a monopoly. The effect of permitting government to issue patents to itself, or to an instrument of state government, is to re-establish the practice of government taxation through the grant of monopolies. It’s just that in the case of a monopoly patent, the public is taxed on the sale of protected goods that may then command a monopoly price, in which the government shares a portion of the proceeds.

The effect re-issuing the patent monopoly is to concentrate transactions through a single, favored private vendor to maximize efficiency and increase the total return to the government ad hoc patent office. This is precisely the same argument made by those who claim that a patent monopoly is necessary to provide an incentive for private capital to pursue development of an invention. That private capital–meaning the investors who control that capital–will only undertake the development of the invention if they can maximize their return on the use of their money by means of the patent monopoly–to prevent competition, to command monopoly prices, to dictate when and how the invention will be produced, marketed, or improved. The premise, then, of the financial interest is not that of mere “consideration for a license” but rather a means of maximizing the taxation through private means available to the government. These aren’t the usual terms in which technology transfer is discussed, but the analysis is clarified when we use words appropriate to what actually happens, not those that obscure the situation.

Introducing Working Requirements

Patents re-issued by an ad hoc patent office typically involve the addition of a working requirement that is not present in federal patent law. Under federal patent law, the inventor has no obligation to work the claimed invention. An inventor may choose not to practice the invention and to prevent all others from practicing the invention as well. There is no requirement that an inventor that cannot or does not use his or her invention must license that invention to others. An inventor fulfills his or her obligations by publishing the invention through the patent system and paying the patent issue and maintenance fees.

Ad hoc patent offices, however, when they re-issue patents to companies as private monopolies typically add a working requirement. A working requirement is express in Bayh-Dole’s statement of policy and definition of practical application. In the context of an assignment cast as an exclusive license, a working requirement make take the form of a plan or diligence or milestone requirements. In other words, the working requirement is negotiated (though in practice it may be stipulated) and is subject to waiver by the ad hoc patent office after a patent has been re-issued.

Where ad hoc patent office operates with patents on inventions that were not made with federal support, the exclusive license apparatus often still imposes a working requirement. The working requirement represents diligence in providing the ad hoc patent office with a financial return in exchange for granting the private monopoly. When the Institutional Patent Agreement program was eventually terminated, one of the criticisms of the program was that universities, in granting exclusive licenses (that were assignments), did not charge enough. That is, they played favorites with their favorites, making enough to keep patent brokers happy, but not enough to make any meaningful difference in any research activities–certainly not enough to justify dealing in private patent monopolies. The open question is whether any amount of money could justify such dealing. Would it make a difference if a multi-billion dollar a year drug was on sale and the company partner did all the work entirely at cost, with all profits going to the university licensing office? We imagine a hopelessly defective company in this scenario, of course, but would it matter that the university reaped profits that otherwise would have gone to company shareholders (or even back into company operations)? Or would we argue that universities should not make their money in this way, exploiting a monopoly just as would private investors? That makes for a useful public policy discussion.

There is another variation on this theme. Ad hoc patent offices routinely do not enforce working requirements in their transactions that create a private monopoly by assigning a patented invention. Rather, the offices structure their working requirement to focus on working the patent right for value rather than working the claimed invention for value. A royalty obligation on working an invention arises when the invention is profitably used. However, a payment obligation in an assignment (or exclusive license) may arise as a result of exploiting the patent right itself–such as sublicensing the patent right or including the patent right in the sale of a company that holds the monopoly. A monopoly patent right may be used to raise investment and hire engineering talent that is then used to create a product that is not within the claims of the licensed/assigned invention. If the ad hoc patent office holds equity in the company as consideration for the conveyance of the monopoly right, then the value recognized, again, is the value of exploiting the patent, not the invention.

As a matter of practice, the primary working requirement in most ad hoc patent offices is not directed at working the invention (“practical application,” in Bayh-Dole’s formulation) but at working the patent as an intangible asset. If the assignee delivers money to the ad hoc patent office, then the working requirement of the assignment is considered to be satisfied, regardless of any other apparatus for diligence.

Bayh-Dole’s Impact

The Bayh-Dole Act was created to enable the pharmaceutical industry to acquire monopoly rights to inventions in medicinal chemistry made with federal government support. Bayh-Dole created two pathways for these rights to flow: through institutions that host federally supported inventions and through federal agencies that fund research, and for each Bayh-Dole creates the regulatory conditions that permit the creation of ad hoc patent offices. These are the only conditions that materially operate in Bayh-Dole–to create the conditions under which institutions can acquire inventions, obtain patents, and license those patents exclusively, for the life of the patent, and with the right of the exclusive licensee to enforce the patent rights (confirming that such licensees are in fact assignees). Almost every other element of Bayh-Dole has been removed by amendment, made secret, made impossible to use by regulation, or left unenforced or unexploited by federal agencies.

Bayh-Dole supersedes federal agency policies that would require federal ownership of inventions made with federal support so that those inventions could be made broadly available to the public to practice and develop. The effect of Bayh-Dole, then, is to prevent the federal government from intervening in universities conveying patents to the pharmaceutical industry and to the biotech industry that acts as a proxy for speculative investment in pharmaceutical-related technology. In these areas, universities and federal agencies now operate their own ad hoc patent offices, compelling assignment of inventions, having patents issued to them, and then trading on those patents with favored companies for a share of the monopoly value of the patents.

In this, Bayh-Dole institutes what the U.S. patent system was designed to preclude–the use of patent monopolies by government as a source of revenue and a means to play favorites. Bayh-Dole, made a part of federal patent law, circumvents the principles that underlie the law to permit the pharmaceutical industry to benefit from federal support for research in medicinal chemistry and related biotechnology, with federal agencies and state governments (along with other nonprofits) authorized to exploit monopolies for a share of the potential profit from the creation of private monopolies in areas of public health.

By construing Bayh-Dole as a government-wide statement of patent policy, the effect has been to force this same ad hoc patent office practice on all other research inventions, the industries that might use these inventions, and the general public that also might use these inventions. Thus, the impact of Bayh-Dole has been to introduce into U.S. patent law the very practices that U.S. patent law was designed to prevent. It may be that we now approve of the government action to create private monopolies that are not based on the merits of an inventor’s work, but such actions appear to be outside the constitutional authority for patents, which is directed to the benefit of inventors and not to the benefit of institutions, governmental or otherwise.

Shutting Down Ad Hoc Patent Offices

An ad hoc patent office operation may be dismantled a number of ways. An institution may repudiate the practice and get out of the patent licensing business. If an institution determines to continue to license patents, then it may unwind an ad hoc patent office operation by making invention assignment voluntary. By making assignment voluntary, an institution allows inventors to negotiate the terms on which the institution may manage any given patent. Thus, the institution restores a degree of agency to its patent licensing operation. If an inventor’s terms are unacceptable to the institution, it is free to decline to manage the invention and the inventor can seek other management assistant options. If the inventor desires the institution to broker the patent rather than to focus on the use of the underlying invention, then it is first up to the institution to endorse such practice before accepting an invention for management on those terms.

An institution can also forbid its licensing operation from trading in patent monopolies. For this, it can restrict licenses to non-exclusive or exclusive licenses that do not grant all substantial rights to any one licensee. Further, an exclusive license to make, use, or sell can be limited by policy to no more than three years from the date of patent issue, or five years from the date of the license, after which time everyone will have access to the invention on fair, reasonable, and non-discriminatory terms. If such requirements are baked into policy, then if an inventor requires non-compliant management, the inventor can seek elsewhere for support.

When public money is used to obtain a patent, the rationale for the use of that money must be based on the use of the patent, not merely on obtaining the patent. If the purpose for which a patent is obtained is to trade it as a private monopoly, then the use of public money is not justifiable, and the institution should decline to pay the costs of pursuing a patent.

Of course, the federal government could correct Bayh-Dole so that it did not permit ad hoc patent offices to operate for inventions made with federal support. In doing so, it would close the backdoor by which federal research funding in the public interest is turned without express notice into a subsidy for private speculation in monopolies on therapies to address matters of human health. The federal government has turned medicine into a cock-fight betting game, and claims that only through such betting games shall diseases may be cured and injuries healed and suffering relieved. It would be a surprising outcome, if true, that progress in the “war on disease” must come by placing discovery in the hands of financial speculators. One wonders if it is even necessary to gather evidence to test the premise. In an age of reason, it might have been enough to reject the premise on inspection. In an age of evidence, however, even the stupidest proposition cannot be challenged without “data.” Thus, any proposition that does not produce data, and like Bayh-Dole keeps any data secret, is not subject to challenge. That in itself should be sufficient evidence to repeal Bayh-Dole or reform it to prevent the operation of ad hoc patent offices by any instrument of state or federal government.